Today, we wanted to share something different: 5 top stocks on sale in Warren Buffett’s portfolio. The benchmark for determining valuation was a discounted cash flow forecast analysis. So, without further ado, let’s kick off with Occidental Petroleum, which has garnered a lot of attention over the past twelve months.
Not only does OXY have 29.3% upside to fair value based on our calculations but it’s also a significant holding for Buffett. A full 4.1% of Berkshire’s portfolio is invested in Occidental Petroleum, an international oil and gas production company.
Here are the reasons that make OXY so compelling to Buffett and his investment team:
- Reserves and Production: Occidental has a diversified portfolio of oil and gas reserves and production assets in the United States, Middle East, and Latin America. The company’s focus on long-life, low-decline assets helps to ensure stable production and cash flow over the long term.
- Cost Reduction Measures: Management has implemented several cost reduction measures, including streamlining its operations, divesting non-core assets, and reducing operating expenses to help maintain its profitability and generate cash flow to reinvest in the business and return capital to shareholders.
- Growth Potential: The company continues to invest in its existing assets and explore for new reserves. It has also made strategic acquisitions to expand its portfolio and enter new markets.
Liberty Sirius XM Group
Next on the list is The Liberty Sirius XM Group, which has a much smaller percentage of his overall holdings at just 0.6% but has upside of 29.4.%, a fraction higher than OXY.
The company has a number of economic moats as Buffett might describe them, including:
- Network Effects: Its platform has a large number of subscribers, which attracts more users, content providers, and advertisers, leading to a virtuous cycle that is difficult for competitors to replicate.
- High Switching Costs: The company has a loyal customer base that has been using its services for years. Due to the high switching costs involved, customers are less likely to switch to competitors, and this provides the company with pricing power.
- Exclusive Content: It enjoys exclusive contracts with a wide range of content providers, including music, news, and sports. This exclusive content is a significant draw for customers, and the company’s ability to maintain these partnerships provides a competitive advantage over other players in the industry.
A third stock that is attractive when examined through the lens of valuation is Kroger, which has 32.5% upside.
Buffett has cut back on his exposure to Kroger, which currently sits at 0.7% of his portfolio but the investment thesis for Kroger is still in tact, and can be summarized as follows:
- Market Position: It’s the largest traditional supermarket chain in the United States, with more than 2,700 stores in 35 states. It also operates over 1,500 fuel centers and over 2,250 pharmacies, making it a one-stop-shop for customers’ grocery and health needs.
- Defensive Business: The grocery industry is relatively resistant to economic downturns and is considered a defensive business. People will always need to buy food, regardless of the economic situation, making Kroger a stable business with predictable cash flows.
- Digital Transformation: Management has been investing heavily in its digital transformation over the past few years, including expanding its home delivery and click-and-collect options.
The penultimate stock on the list is RH, which our numbers suggest has as much as 38.5% upside potential. Why buy RH?
- Innovative Business Model: RH has a vertically integrated business model, meaning that it owns and operates its manufacturing facilities, which helps it maintain control over quality, lead times, and costs.
- Strong Brand: The company’s strong brand translates to a loyal customer base. It’s also invested heavily in its brand by creating aesthetically rich stores that provide a pretty unique shopping experience for customers.
- Growth Potential: The company has been expanding its product offerings and opening new stores, both in the United States and internationally. RH has also been investing in its digital presence, which should help it reach a wider audience.
Last but not least on the list is McKesson, which has 38.8% upside but only commands a 0.4% holding in Berkshire’s portfolio.
Why would Buffett and his lieutenants snap up shares of this healthcare distributor.
- Demographic Trends: As the population ages, demand for healthcare products and services is expected to increase. McKesson is well-positioned to benefit from this trend because it provides a wide range of products and services that are crucial for the healthcare industry.
- Healthcare Digitization: McKesson has solutions for supply chain management, electronic health records, and other healthcare-related technologies.
- Financial Track Record: Management has consistently delivered revenue growth and high profitability margins. It generates significant cash flow, which it has used to pay down debt, invest in the business, and return capital to shareholders through dividends and share buybacks.